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Dialogue: 0,0:00:00.00,0:00:02.90,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:08.90,0:00:12.24,Default,,0000,0000,0000,,- Today we're going to look at the\NCoase Theorem and market solutions to
Dialogue: 0,0:00:12.42,0:00:18.20,Default,,0000,0000,0000,,externality problems. Basically what Coase\Npointed out in a remarkable paper was that
Dialogue: 0,0:00:18.38,0:00:22.56,Default,,0000,0000,0000,,the problem with external benefits and\Nexternal cost is not that they're
Dialogue: 0,0:00:22.74,0:00:28.52,Default,,0000,0000,0000,,External, but rather that property rights\Nin these cases are vague and uncertain
Dialogue: 0,0:00:28.70,0:00:33.79,Default,,0000,0000,0000,,and that transactions costs are high.\NLet's get started with an example.
Dialogue: 0,0:00:38.10,0:00:40.82,Default,,0000,0000,0000,,The Nobel prize winning\Neconomist, James Meade,
Dialogue: 0,0:00:41.00,0:00:46.62,Default,,0000,0000,0000,,argued that the market would underprovide\Nhoney and pollination services. Bees, Meade
Dialogue: 0,0:00:46.80,0:00:51.88,Default,,0000,0000,0000,,argued, do two things. First, they create\Nhoney. That honey is bought and sold in
Dialogue: 0,0:00:52.06,0:00:57.64,Default,,0000,0000,0000,,markets and there's a price for the honey.\NSecond, however, bees will also fly out and
Dialogue: 0,0:00:57.82,0:01:03.03,Default,,0000,0000,0000,,they'll pollinate the crops of nearby\Nfarmers. That's a very useful service, but
Dialogue: 0,0:01:03.21,0:01:08.05,Default,,0000,0000,0000,,Meade argued that the farmers wouldn't be\Npaying for that service. The pollination
Dialogue: 0,0:01:08.23,0:01:13.59,Default,,0000,0000,0000,,services, Meade argued, were an external\Nbenefit. Because the beekeepers were not
Dialogue: 0,0:01:13.77,0:01:19.12,Default,,0000,0000,0000,,being paid for these useful pollination\Nservices, there would be too few bees, and
Dialogue: 0,0:01:19.30,0:01:22.75,Default,,0000,0000,0000,,as a result, too little honey, and\Nalso too little crops and too
Dialogue: 0,0:01:22.75,0:01:24.51,Default,,0000,0000,0000,,little pollination services.
Dialogue: 0,0:01:25.85,0:01:30.94,Default,,0000,0000,0000,,However, another economist, Steven Cheung,\Nproved that the Nobel Prize winner was
Dialogue: 0,0:01:31.12,0:01:36.27,Default,,0000,0000,0000,,wrong, and he did so by consulting the\NYellow Pages. Cheung discovered that
Dialogue: 0,0:01:36.45,0:01:43.27,Default,,0000,0000,0000,,pollination in the United States, in fact,\Nis a $15 billion industry. Beekeepers
Dialogue: 0,0:01:43.45,0:01:47.77,Default,,0000,0000,0000,,regularly truck their bee colonies around\Nthe country and they sell their
Dialogue: 0,0:01:47.95,0:01:54.17,Default,,0000,0000,0000,,pollination services to farmers. Because\Nthe farmers are paying the beekeepers for
Dialogue: 0,0:01:54.35,0:01:58.80,Default,,0000,0000,0000,,the services of the bees, the benefits in\Nfact are not external - they're not on
Dialogue: 0,0:01:58.98,0:02:06.09,Default,,0000,0000,0000,,bystanders - and the market works.\NSo why did Meade get it wrong? What about
Dialogue: 0,0:02:06.27,0:02:11.32,Default,,0000,0000,0000,,the bees, and what about the farmers, made\Nit possible for this externality problem
Dialogue: 0,0:02:11.50,0:02:17.07,Default,,0000,0000,0000,,to be solved by markets when many other\Nexternality problems are not?
Dialogue: 0,0:02:17.25,0:02:21.66,Default,,0000,0000,0000,,The market for pollination works despite\Nthe fact that bees seem to create this
Dialogue: 0,0:02:21.84,0:02:27.68,Default,,0000,0000,0000,,external benefit because transactions\Ncosts are low. That is, all of the costs
Dialogue: 0,0:02:27.68,0:02:33.76,Default,,0000,0000,0000,,necessary for buyers and sellers to reach\Nan agreement are low. In particular, bees
Dialogue: 0,0:02:33.94,0:02:40.54,Default,,0000,0000,0000,,simply don't fly very far. So an agreement\Nbetween one beekeeper and one farmer can
Dialogue: 0,0:02:40.72,0:02:46.20,Default,,0000,0000,0000,,internalize all the externality. That is, if\Nthe beekeeper puts his bees in the middle
Dialogue: 0,0:02:46.38,0:02:51.66,Default,,0000,0000,0000,,of the farm, basically the only crops\Nwhich are going to be pollinated are the
Dialogue: 0,0:02:51.84,0:02:58.20,Default,,0000,0000,0000,,crops of that single farmer. So once an\Nagreement is made between that beekeeper
Dialogue: 0,0:02:58.38,0:03:03.79,Default,,0000,0000,0000,,and that farmer, all of the externalities\Nhave been internalized. There are no
Dialogue: 0,0:03:03.97,0:03:10.29,Default,,0000,0000,0000,,bystanders once the beekeeper and the\Nfarmer make an agreement. Moreover, the
Dialogue: 0,0:03:10.47,0:03:16.41,Default,,0000,0000,0000,,property rights here are very clear. The\Nbeekeeper has the rights to the honey. The
Dialogue: 0,0:03:16.59,0:03:20.91,Default,,0000,0000,0000,,farmer owns the crops that the bees\Npollinate. There isn't going to be a lot
Dialogue: 0,0:03:21.09,0:03:27.07,Default,,0000,0000,0000,,of bargaining and disagreement about who\Nowns what. The property rights are clear.
Dialogue: 0,0:03:27.25,0:03:31.89,Default,,0000,0000,0000,,In other cases of externalities, some of\Nthe ones we've looked at previously,
Dialogue: 0,0:03:32.07,0:03:37.57,Default,,0000,0000,0000,,neither of these things are true.\NTransactions costs are high and property
Dialogue: 0,0:03:37.75,0:03:43.30,Default,,0000,0000,0000,,rights are unclear. Let's compare with\Npollution and flu shots. In both cases
Dialogue: 0,0:03:43.48,0:03:48.26,Default,,0000,0000,0000,,here, the transactions costs are high and\Nproperty rights are unclear and uncertain.
Dialogue: 0,0:03:48.44,0:03:53.18,Default,,0000,0000,0000,,Consider pollution: there's an external\Ncost - the factory is putting lots of
Dialogue: 0,0:03:53.36,0:03:58.08,Default,,0000,0000,0000,,pollution up into the sky, but on who?\NIt's not necessarily on the people who
Dialogue: 0,0:03:58.26,0:04:03.15,Default,,0000,0000,0000,,live right next door to the factory.\NThe pollution could be causing acid rain,
Dialogue: 0,0:04:03.33,0:04:07.07,Default,,0000,0000,0000,,which is ruining lakes hundreds of miles\Naway, or it could be causing global
Dialogue: 0,0:04:07.25,0:04:12.01,Default,,0000,0000,0000,,warming which is increasing sea levels and\Nruining people's lives thousands of miles
Dialogue: 0,0:04:12.19,0:04:17.40,Default,,0000,0000,0000,,away. And exactly what are the costs? How\Nmuch? How can we measure these costs? It's
Dialogue: 0,0:04:17.40,0:04:24.86,Default,,0000,0000,0000,,not obvious. Moreover, who has the rights\Nhere? Should the factory have to pay to
Dialogue: 0,0:04:24.86,0:04:30.52,Default,,0000,0000,0000,,pollute? Should it have to pay the people\Nto whom it imposes an external cost? Or,
Dialogue: 0,0:04:30.52,0:04:35.50,Default,,0000,0000,0000,,should the bystanders have to pay the\Nfactory not to pollute? Does the factory
Dialogue: 0,0:04:35.50,0:04:40.12,Default,,0000,0000,0000,,have the right not to pollute, and do the\Nbystanders have to pay the factory to
Dialogue: 0,0:04:40.12,0:04:42.79,Default,,0000,0000,0000,,stop? If you think\Nthat's obvious,
Dialogue: 0,0:04:42.79,0:04:47.07,Default,,0000,0000,0000,,let's consider a flu shot. There\Nare external benefits if I get
Dialogue: 0,0:04:47.25,0:04:51.69,Default,,0000,0000,0000,,a flu shot. For example, I'm less likely\Nto sneeze on people on the subway and give
Dialogue: 0,0:04:51.87,0:04:56.88,Default,,0000,0000,0000,,them the flu but that could be hundreds,\Ndozens of people, hundreds of people. I
Dialogue: 0,0:04:57.06,0:05:01.74,Default,,0000,0000,0000,,don't know exactly which people get the\Nexternal benefit. And how much is this
Dialogue: 0,0:05:01.92,0:05:08.05,Default,,0000,0000,0000,,external benefit? It's hard to measure,\Nonce again. Moreover, should people have
Dialogue: 0,0:05:08.23,0:05:15.93,Default,,0000,0000,0000,,to pay me to get a flu shot or should I\Nhave to pay others if I don't get a shot?
Dialogue: 0,0:05:16.11,0:05:19.80,Default,,0000,0000,0000,,Now, by the way, let's compare these two\Nthings - the pollution and the flu shot. If
Dialogue: 0,0:05:19.98,0:05:24.85,Default,,0000,0000,0000,,you thought it was obvious that the\Nfactory should have to pay to pollute and
Dialogue: 0,0:05:25.03,0:05:30.80,Default,,0000,0000,0000,,not that the bystanders should have to pay\Nthe factory, well, consider the flu shot.
Dialogue: 0,0:05:30.98,0:05:35.97,Default,,0000,0000,0000,,Isn't sneezing, if you don't get a flu\Nshot, isn't sneezing, isn't that like
Dialogue: 0,0:05:36.15,0:05:41.97,Default,,0000,0000,0000,,pollution? Isn't that polluting? Shouldn't\Nthe polluter, the sneezer have to pay? So
Dialogue: 0,0:05:42.15,0:05:47.10,Default,,0000,0000,0000,,in that case you might want to argue that\Nif you don't get a flu shot, you should
Dialogue: 0,0:05:47.28,0:05:52.90,Default,,0000,0000,0000,,have to pay others. You're polluting on\Nthem. Right? So the rights here are not as
Dialogue: 0,0:05:53.08,0:05:58.81,Default,,0000,0000,0000,,obvious as we might think at first glance.\NMoreover, the main point is, is that the
Dialogue: 0,0:05:58.99,0:06:02.49,Default,,0000,0000,0000,,transactions costs of coming to an\Nagreement between these hundreds or
Dialogue: 0,0:06:02.67,0:06:06.95,Default,,0000,0000,0000,,thousands or perhaps millions of people,\Nfiguring out what the external costs are,
Dialogue: 0,0:06:07.13,0:06:12.28,Default,,0000,0000,0000,,making that bargain, that's going \Nto be very costly. And, we
Dialogue: 0,0:06:12.46,0:06:16.51,Default,,0000,0000,0000,,can't even agree on who has the rights\Nhere, or it's very difficult to come to an
Dialogue: 0,0:06:16.69,0:06:21.71,Default,,0000,0000,0000,,agreement. Should the factory have to pay?\NShould the factory be the one to be paid?
Dialogue: 0,0:06:21.89,0:06:26.96,Default,,0000,0000,0000,,Should the person getting the flu shot be\Npaid, or should the person not getting the
Dialogue: 0,0:06:27.14,0:06:32.99,Default,,0000,0000,0000,,flu shot have to pay? The rights here are\Nuncertain, and unclear, and again, that's
Dialogue: 0,0:06:33.17,0:06:38.37,Default,,0000,0000,0000,,also going to make coming to a market\Nagreement difficult to do, and therefore
Dialogue: 0,0:06:38.55,0:06:43.35,Default,,0000,0000,0000,,the market isn't going to solve these\Ntypes of externality problems very easily.
Dialogue: 0,0:06:43.35,0:06:48.75,Default,,0000,0000,0000,,So the conclusion here is that the market\Ncan be efficient even when there are
Dialogue: 0,0:06:48.93,0:06:53.54,Default,,0000,0000,0000,,externalities - when transactions costs are\Nlow and when property rights are clearly
Dialogue: 0,0:06:53.72,0:06:59.00,Default,,0000,0000,0000,,defined. And in fact that's the Coase\NTheorem. If transactions costs are low and
Dialogue: 0,0:06:59.18,0:07:03.58,Default,,0000,0000,0000,,property rights are clearly defined,\Nprivate bargains will ensure that the
Dialogue: 0,0:07:03.76,0:07:08.99,Default,,0000,0000,0000,,market equilibrium is efficient even if\Nthere are externalities.
Dialogue: 0,0:07:09.17,0:07:12.92,Default,,0000,0000,0000,,The conditions for the Coase Theorem to be\Nmet, low transactions costs and clear
Dialogue: 0,0:07:13.10,0:07:19.55,Default,,0000,0000,0000,,property rights, are in practice often not\Nmet. Even so, however, the theorem does
Dialogue: 0,0:07:19.73,0:07:24.01,Default,,0000,0000,0000,,suggest an alternative approach to\Nexternalities. We've already looked at the
Dialogue: 0,0:07:24.40,0:07:29.27,Default,,0000,0000,0000,,Pigouvian taxes and subsidies, and command\Nand control. The Coase Theorem suggests
Dialogue: 0,0:07:29.45,0:07:37.08,Default,,0000,0000,0000,,another solution, namely the creation of\Nnew markets. If the government can define
Dialogue: 0,0:07:37.26,0:07:43.65,Default,,0000,0000,0000,,property rights and reduce transactions\Ncosts, then markets can be used to control
Dialogue: 0,0:07:43.83,0:07:48.69,Default,,0000,0000,0000,,externality problems. So the Coase Theorem\Nplus a little bit of command and control
Dialogue: 0,0:07:48.87,0:07:53.20,Default,,0000,0000,0000,,in terms of defining property rights and\Nreducing transactions costs, can create a
Dialogue: 0,0:07:53.38,0:07:59.63,Default,,0000,0000,0000,,new form of solution to externality\Nproblems. And in fact tradable, permits is
Dialogue: 0,0:07:59.81,0:08:02.44,Default,,0000,0000,0000,,what we're going to be\Nlooking at in the next talk.
Dialogue: 0,0:08:02.44,0:08:07.77,Default,,0000,0000,0000,,- [Announcer] If you want to test\Nyourself, click "Practice Questions." Or,
Dialogue: 0,0:08:07.95,0:08:11.56,Default,,0000,0000,0000,,if you're ready to move on,\Njust click "Next Video."
Dialogue: 0,0:08:11.56,0:08:14.50,Default,,0000,0000,0000,,♪ [music] ♪